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The Natural Gas Renaissance

|Includes: Apache Corporation (APA), SJT, UNL


  • Approximately half of the 500+ coal fired generation plants will be shut down in the next few years, eliminating natural gas's main competitor and price volatility;
  • Climate change, if you are a believer, resulted in an extreme pull on natural gas inventories last winter, taking them to 800 BCF (and both extremes in temperature result in increased natural gas demand);
  • Electric eventually becoming the bridge transportation fuel, resulting in even more gas fired generation plants;
  • Judging from the monthly chart, we saw our lows last year (which on a real dollar basis rivaled the lows in the last extended gas glut in 1992 on an inflation adjusted basis); and
  • Nuclear generation dying on the vine, only to replaced long term by yet more gas fired generation.

Even if you are not a believer in climate change, there remains a question of explanation and most apologist theories I have heard acknowledge extended periods of extreme weather in history (which they contend is normal or cyclical), saying the current extremes are temporary. As an investor and trader of natural gas and oil, I'm only interested in the next 10 years, so whether the "climate change" is temporary or extended, my nose is only so long. All the above trends, then, are real, and will contribute to the long term demand for the commodity and reduce the periodic price volatility. The EPA has become the industry's best friend, protecting natural gas from coal through time, encouraging that industry to export it to pollute other economies and continue contributing to global warming, if you are a believer. I expect term contracting to come back, as the affected utilities will focus on reserves, and most new sources of natural gas are unconventional and require continuous drilling, and yes, dastardly fracking. Get out the garlic wreaths and crucifixes. I would not even be surprised to see take-or-pay (a contractual remedy for failure to buy specified quantities) contracts again. And all of this is not to mention some industry think tanks think that there is a point to where the unconventional, new production with steep hyperbolic declines will fail to offset the decline of conventional reserves. All said, natural gas is a great long term (the length of my nose being 10 years) investing trend.

On the commodity as a relatively small investor, I do not like the timing risk on futures or leap options. UNL is an ETF that looks at the rolling 12-month strip and tracks the price real well. I also like in here natural gas royalty trusts, like San Juan Royalty Trust, SJT. SJT could go to historical levels over time, and you get paid a great dividend while you wait. Independents with substantial gas reserves, which were hurt by the recent gas glut, like Apache, APA, which is trading near book value and has a lot of gas coming on in the near future. There are others and they are recovering. Look at EnCana (ECA), for example.

Disclaimer: I own APA, UNL and SJT.

Disclosure: I am long APA, SJT, UNL.